Problem:
The Thompson Corporation projects an increase in sales from $1 million to $3 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay payment for an additional 35 days - paying in 65 days and thus becoming 35 days past due - without a penalty because of its suppliers' currently have excess capacity.
Required:
Question: What is the effective, or equivalent, annual cost of the trade credit? Assume 365 days in year for your calculations.
Note: Please provide reasons to support your answer.